What Is a Credit Utilization Ratio?
Your credit utilization ratio is the percentage of your available revolving credit that you’re currently using. For example, if you have a total credit limit of $10,000 across all your credit cards and you have used $3,000 across all your credit cards, your credit utilization ratio is 30% ($3,000 / $10,000).
Lenders use your credit utilization ratio to assess your credit risk. A high credit utilization ratio can indicate that you’re not managing your debt well, which can make it more difficult to get approved for loans or credit cards you want.
That’s why I always make sure to keep my credit utilization ratio low. Most would recommend keeping it below 30%, but I keep it below 10%. That is mainly due to being able to build my total credit limit to over $43,000.
There are a few reasons why I keep my credit utilization ratio low. First, it helps me maintain a great FICO Score. A high FICO Score can make it easier to get approved for loans and credit cards, and it can also lead to lower interest rates. Second, keeping my credit utilization ratio low helps me feel more financially secure. I know that I have a buffer in case I need to make a large purchase or must pay for an unexpected expense. Finally, keeping my credit utilization ratio low is just a good habit I like to have for long-term financial success.
There are two key things you can do to keep your credit utilization ratio low. The first is to pay your credit card bills in full every month. This will help you avoid carrying a balance, which will lower your credit utilization ratio. The second is to consider asking your credit card issuer to increase your credit limit. This will give you more available credit, which will lower your credit utilization ratio.
Keeping your credit utilization ratio low is a simple way to improve your credit score and protect your financial security. If you need help with how to calculate your credit utilization ratio, you can use a free FICO Score website such as Experian.